Sparks and Flames Amsterdam December 2007

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Sparks and Flames Conference Flexibility in Supply Security and Optimizing the Fuel Mix 7 November Amsterdam Exploring the Gas Supply Options from the Balkans: What are Political Developments and Competitive Dynamics of the Market Valentin Kunev Executive Director Balkan and Black Sea Petroleum Association

Presentation StructureSupplies from the Balkans as non-complimentory and real alternativesCompetitive Supply DynamicsThe second round of EU gas market liberalization efforts and the Balkan countries enrollmentEnergy Community treaty impact on diversification projects: 

Presentation Structure Supplies from the Balkans as non-complimentory and real alternatives Competitive Supply Dynamics The second round of EU gas market liberalization efforts and the Balkan countries enrollment Energy Community treaty impact on diversification projects

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Supplies from the Balkans as non-complimentary and real alternatives Option 1 – Indegenous gas export With the exception of Romania, indigenous gas production takes less than 50% of Balkan countries’ demand. For the majority cases indigenous production is small to insignificant. - The “new” Bulgarian Galata gas discovery is approaching exhaustion with raising question about possibility for conversion into gas storage - Turkey new small gas discovery offshore Black Sea - Romania succeded to decrease gas production decline to below 5% - In general gas production from the Balkan countries is declining

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Balkan countries produce much less than use and the potential to improve this seems to be not very optimistic, if not big discoveries are made. The potential of domestic gas export is very small given the lower price of domestic production and the pressure coming from import. With increase of indigenous gas price the possibilities of cross-border domestic gas trade will increase.

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The major efforts of Balkan countries concerning domestic gas production is how more effectively to depress decline. The picture can be changed by big discoveries in unexplored areas as is the Black Sea deep waters. The expectations from Balkan governments are to enhance by lower taxes and favorable legal regimes the extremely expensive and risky explorations. Comparison Black Sea Less than 100 wells drilled Political systems opening up North Sea More than 7000 wells drilled First 75 wells dry

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Option 2 – Re-export and transit Gazprom takes all the imports to the Balkan countries with the exception of Greece and Turkey. In Turkey 40% of imports refer to Iran pipeline supplies and LNG supplies from Algeria and Nigeria. In Greece considerable imports refer to LNG supplies. The present gas importers to the Balkan countries (Gazprom and Iran) do not allow re-export. Gazprom supplies to the Balkans are realized by subsidiaries or joint ventures which locally download supply monopoly. Political implications are always possible. In contrast to Iran, Gazprom and Algeria, Shah Deniz project developers in Azerbaijan allow Turkey to re-export their gas.

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Stage 1 Capacity 8.5 BCM/Y Investments: 2.3 bill USD Stage 1 Sanction: February 2003 First gas: October 2006 Stage 1 gas sales contracts: Turkey - 6,6 BCM Azerbaijan - 1,5 BCM Georgia - 0,5 BCM The Shah Deniz Perspective

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Cost of Supply to the European Border Upstream Transportation 0 0,5 1 1,5 2 2,5 3 Russia Yamal Norway 4th Corridor (Caspian) $/mmbtu East-West Gas Corridor Source: BP

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Production Import Export to Greece Demand 2000 0,64 14,82 15,46 2001 0,31 16,37 16,68 2002 0,38 17,63 18,01 2003 0,56 21,18 21,74 2004 0,71 22,17 22,88 2005 0,9 27,03 27,93 2006 1,1 31,2 0,25 32,55 2010 1,2 37,3 0,74 39,24 2015 0,8 40,3 0,74 41,84 2020 0,8 42,6 0,74 44,14 Turkish Gas Supplies DEPA and Greece take advantage to this situation to supply Azeri gas.

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Fourth Corridor is Part of Europe’s Five Gas Corridors Norway & N Sea Russia Caspian Gulf Existing pipeline LNG Proposed 4th Corridor LNG N. Africa

Fourth Gas Corridor: 

Fourth Gas Corridor 4th gas corridor includes European supplies from south-of-Black Sea pipeline routes. Compared to the established and dominant north-of-Black Sea routes, 4th gas corridor is in an initial stage of realization and its latest status includes developments in: Azerbaijan Turkey Greece Nabucco project Poseidon project/Trans-Adriatic Project

Azerbaijan developments: 

Azerbaijan developments Shah Deniz SCP

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South Caucasus Pipeline + Botas Extension South Caucasus - Azerbaijan – Turkey (border) Length: 690 Cost: $1.1 Status: Under Construction

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Turkey Gas infrastructure development Greece Turkey-Greece Interconnector Length 300 km Cost $0.35 bn Status Construction Completed - Turkish part Karacabey–Turkish/Greek border 210 km (17 km submarine, max. depth: 70 m) EU granted (TEN)50%, both the feasibility, engineering and the EIA - Greek part Greek/Turkish border-Komotini: 85 Km EU granted (TEN)50%, both the feasibility, engineering and the EIA EU granted (TEN) 29%, Construction

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Greece-Italy Interconnector (IGI) Length: 810 Cost: $1bn Status: Under evaluation Botaş, Depa, Edison Gas – Poseidon Co 11-12 bcm to Greece (3.6) and Italy (8) - first calculations To reach plateau capacity in 2012

Trans-Adriatic Pipeline Project: 

Trans-Adriatic Pipeline Project To be decided in 2007 If decided, can be constructed by 2010 EGL proposes 12 Bcm of Italian demand to be supplied by Trans-Adriatic pipeline, 5 Bcm out of which to be taken by EGL Source: EGL

Italian Gas Demand and Production: 

Italian Gas Demand and Production Avarage annual growth for the last three years is high Which means 10 -15 more Bcm needed by 2010 as demand Average decline of production for the same period is 6% Which means 1-2 Bcm added to the demand growth or 12 -17 Bcm more to be imported

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Source: EGL Trans-Adriatic Pipeline is more complimentary and Italian rather than Pan-European and gas supply diversifying option It is open to third parties, but restricted to Italian market.

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Nabucco Project Nabucco: Caspian – Austria Length: 3200 Cost: €4.6 Status: advanced feasibility Egypt gas to reach Turkey through Arab pipeline included in the supply portfolio In 2006 Nabucco Project gained the status of Priority Project for EC

Nabucco Project: 

Nabucco Project Nabucco Study Company Pipeline GmbH established. Botaş, Bulgargaz, Transgaz, MOL, OMV Erdgas 25 plus Bcm target market (first calculations) Start with 2009 Feasibility study, half granted by the European Commission TEN Programme. Financial Study launched.

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Nabucco Project - Pan-European perspective

EU 4 Gas Demand and Production: 

EU 4 Gas Demand and Production Avarage annual growth for the last three years is 2% Which means 32 more Bcm needed by 2010 as demand Average decline of production for the same period is 5% Which means 26 Bcm added to the demand growth or 58 Bcm more to be imported

4th gas corridor – onroute countries: 

4th gas corridor – onroute countries On-route-countries on the corridor, like Hungary and Greece are members of the EU, others like Romania and Bulgaria will soon join it, thus becoming part of the consumer target, not only transit systems, sharing the same market rules based on diverse suppliers. On-Route Off takes Greece – up to 3,6 Bcm - mainly power generation Albania used to consume 1 Bcm. At present the consumption is zero. Free for private investments in gas-fired power generation. Bulgaria – additional from present consumption, corresponding to 2-3 % annual gas demand growth. Romania – 3 то 5 Bcm/y take off for Nabucco supplies

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LNG Terminal project in Croatia Partners: E.ON AG, Total SA, OMV AG, RWE Transgas, INA and Geoplin involved in the study Capacity: 10 Bcm Completion – by 2011

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33 items on the regional agenda – 22 positively influencing supply from the Balkans Competitive Supply Dynamics Infrastructure and projects Pipelines and Fields Developments in the regional scene How they influence on the possibility to have gas supply from the Balkans

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The second round of EU gas market liberalization efforts and the Balkan countries enrollment Circumstance connected with the competition law - market concentration should be considered as a major problem for achieving liberalization of the market and the EC will identify the corresponding criteria for estimating the violation of law for the particular market environment; - long term contracts in the cases when the competition law is violated; - third party access to the transit capacities and the gas storage capacities.

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Circumstances connected with the regulation of the gas market - the transparency should be increased to be also obligatory as a regulation or under the competition law; - the “grandfathering” rights which seriously impede effective entry of competitors and undermine the pro-competitive operation of the market; - international gas pipeline projects need additional regulatory environment, which will ensure investment protection and security.

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Energy Community Treaty and its Impact on Gas Supply Diversification General Considerations The treaty fundamental principles should be directed towards establishment and protection of market economy values of competition and freedom of choice. In particular Gas supply diversification will improve when market will be driven by more players and not by one player or couple of players. Mixing of supplied and transit gas to achieve below-European-price levels, in Eastern Europe though beneficial for consumers, can be considered as non-market practice distorting the market environment. Such practices link the national economy to a definite supply scheme, leaving no flexibility and possibility for investments in new supply options.

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Thank you! Balkan and Black Sea Petroleum Association bbspetroleum@bbspetroleum.com www.bbspetroleum.com